Tag Archives: BLS

A $15 minimum wage will excessively harm California’s poorest counties

Lawmakers in California are thinking about increasing the state minimum wage to $15 per hour by 2022. If it occurs it will be the latest in a series of increases in the minimum wage across the country, both at the city and state level.

Increases in the minimum wage make it difficult for low-skill workers to find employment since the mandated wage is often higher than the value many of these workers can provide to their employers. Companies won’t stay in business long if they are forced to pay a worker $15 per hour who only produces $12 worth of goods and services per hour. Statewide increases may harm the job prospects of low-skill workers more than citywide increases since they aren’t adjusted to local labor market conditions.

California is a huge state, covering nearly 164,000 square miles, and contains 58 counties and 482 municipalities. Each of these counties and cities has their own local labor market that is based on local conditions. A statewide minimum wage ignores these local conditions and imposes the same mandated price floor on employers and workers across the state. In areas with low wages in general, a $15 minimum wage may affect nearly every worker, while in areas with high wages the adverse effects of a $15 minimum wage will be moderated. As explained in the NY Times:

“San Francisco and San Jose, both high-wage cities that have benefited from the tech boom, are likely to weather the increase without so much as a ripple. The negative consequences of the minimum wage increase in Los Angeles and San Diego — large cities where wages are lower — are likely to be more pronounced, though they could remain modest on balance.

But in lower-wage, inland cities like Bakersfield and Fresno, the effects could play out in much less predictable ways. That’s because the rise of the minimum wage to $15 over the next six years would push the wage floor much closer to the expected pay for a worker in the middle of the wage scale, affecting a much higher proportion of employees and employers there than in high-wage cities.”

To put some numbers to this idea, I used BLS weekly wage data from Dec. of 2014 to create a ratio for each of California’s counties that consists of the weekly wage of a $15 per hour job (40 x $15 = $600) divided by the average weekly wage of each county. The three counties with the lowest ratio and the three counties with the highest ratio are in the table below, with the ratio depicted as a percentage in the 4th column.

CA county weekly min wage ratio

The counties with the lowest ratios are San Mateo, Santa Clara, and San Francisco County. These are all high-wage counties located on the coast and contain the cities of San Jose and San Francisco. As an example, a $600 weekly wage is equal to 27.7% of the average weekly wage in San Mateo County.

The three counties with the highest ratios are Trinity, Lake, and Mariposa County. These are more rural counties that are located inland. Trinity and Lake are north of San Francisco while Mariposa County is located to the east of San Francisco. In Mariposa County, a $600 weekly wage would be equal to 92.6% of the avg. weekly wage in that county as Dec. 2014. The data shown in the table reveal the vastly different local labor market conditions that exist in California.

The price of non-tradeable goods like restaurant meals, haircuts, automotive repair, etc. are largely based on local land and labor costs and the willingness to pay of the local population. For example, a nice restaurant in San Francisco can charge $95 for a steak because the residents of San Francisco have a high willingness to pay for such meals as a result of their high incomes.

Selling a luxury product like a high-quality steak also makes it relatively easier to absorb a cost increase that comes from a higher minimum wage; restaurant workers are already making relatively more in wealthier areas and passing along the cost increase in the form of higher prices will have a small effect on sales if consumers of steak aren’t very sensitive to price.

But in Mariposa County, where the avg. weekly wage is only $648, a restaurant would have a hard time attracting customers if they charged similar prices. A diner in Mariposa County that sells hamburgers is probably not paying its workers much more than the minimum wage, so an increase to $15 per hour is going to drastically affect the owner’s costs. Additionally, consumers of hamburgers may be more price-sensitive than consumers of steak, making it more difficult to pass along cost increases.

Yet despite these differences, both the 5-star steakhouse in San Francisco and the mom-and-pop diner in Mariposa County are going to be bound by the same minimum wage if California passes this law.

In the table below I calculate what the minimum wage would have to be in San Mateo, Santa Clara, and San Francisco County to be on par with a $15 minimum in Mariposa County.

CA comparable min wage

If the minimum wage was 92.6% of the average wage in San Mateo it would be equal to $50.14. Using the ratio from a more developed but still lower-wage area – Kern County, where Bakersfield is located – the minimum wage would need to be $37.20 in San Mateo. Does anyone really believe that a $50 or $37 minimum wage in San Mateo wouldn’t cause a drastic decline in employment or a large increase in prices in that county?

If California’s lawmakers insist on implementing a minimum wage increase they should adjust it so that it doesn’t disproportionately affect workers in poorer, rural areas. But of course this is unlikely to happen; I doubt that the voters of San Mateo, Santa Clara, and San Francisco County will be as accepting of a $37 + minimum wage as they are of a $15 minimum wage that won’t directly affect many of them.

A minimum wage of any amount is going to harm some workers by preventing them from getting a job. But a minimum wage that ignores local labor market conditions will cause relatively more damage in poorer areas that are already struggling, and policy makers who ignore this reality are excessively harming the workers in these areas.

Teenage unemployment in cities

New research that examines New York’s Summer Youth Employment Program (SYEP) finds that participation in the program positively impacts student academic outcomes. As the authors state in the introduction, youth employment has many benefits:

“Prior research suggests that adolescent employment improves net worth and financial well-being as an adult. An emerging body of research indicates that summer employment programs also lead to decreases in violence and crime. Work experience may also benefit youth, and high school students specifically, by fostering various non-cognitive skills, such as positive work habits, time management, perseverance, and self-confidence.” (My bold)

This is hardly surprising news to anyone who had a summer job when they were young. An additional benefit from youth employment not mentioned by the authors is that the low-skill, low-paying jobs held by young people also provide them with information about what they don’t want to do when they grow up. Working in a fast food restaurant or at the counter of a store in the local mall helps a young person appreciate how hard it is to earn a dollar and provides a tangible reason to gain more skills in order to increase one’s productivity and earn a higher wage.

Unfortunately, many young people today are not obtaining these benefits. The chart below depicts the national teenage unemployment rate and labor force participation rate (LFP) from 2005 to 2015 using year-over-year August data from the BLS.

national teen unemp, LFP

During the Great Recession teenage employment fell drastically, as indicated by the simultaneous increase in the unemployment rate and decline in the LFP rate from 2007 to 2009. From its peak in 2010, the unemployment rate for 16 to 19 year olds declined slowly until 2012. This decline in the unemployment rate coincided with a decline in the LFP rate and thus the latter was partly responsible for the former’s decline. More recently, the labor force participation rate has flattened out while the unemployment rate has continued to decline, which means that more teenagers are finding jobs. But the teenagers who are employed are part of a much smaller labor pool than 10 years ago – nationally, only 33.7% of 16 to 19 year olds were in the labor force in August 2015, a sharp decline from 44% in 2005.

Full-time teenage employment is unique in that it has a relatively high opportunity cost – attending school full time. Out of the teenagers who work at least some portion of the year, most only work during the summer when school is not in session. Some teenagers also work during the school year, but this subset of teenage workers is smaller than the set who are employed during the summer months. Thus a decline in the LFP rate for teenagers may be a good thing if the teenagers who are exiting the labor force are doing so to concentrate on developing their human capital.

Unfortunately this does not seem to be the case. From 2005 to 2013 the enrollment rate of 16 and 17 year olds actually declined slightly from 95.1% to 93.7%.  The enrollment rate for 18 and 19 year olds stayed relatively constant – 67.6% in 2005 and 67.1% in 2013, with some mild fluctuations in between. These enrollment numbers coupled with the large decline in the teenage LFP rate do not support the story that a large number of working teenagers are exiting the labor force in order to attend school full time. Of course, they do not undermine the story that an increasing amount of teenagers who are both in the labor force and attending school at the same time are choosing to exit the labor force in order to focus on school. But if that is the primary reason, why is it happening now?

Examining national data is useful for identifying broad trends in teenage unemployment, but it conceals substantial intra-national differences. For this reason I examined teenage employment in 10 large U.S. cities (political cities, not MSAs) using employment status data from the 5-year American Community Survey (ACS Table S2301. 2012 was the latest data available for all ten cities).

The first figure below depicts the age 16 – 19 LFP rate for the period 2010 – 2012. As shown in the diagram there are substantial differences across cities.

City teenage LFP

For example, in New York (dark blue) only 23% of the 16 – 19 population was in the labor force in 2012 – down from 25% in 2010 – while in Denver 43.5% of the 16 – 19 population was in the labor force. Nearly every city experienced a decline over this time period, with only Atlanta (red line) experiencing a slight increase. Five cities were below the August 2012 national rate of 34% – Chicago, Philadelphia, Atlanta, San Francisco, and New York.

Also, in contrast to the improving unemployment rate at the national level from 2010 – 12 shown in figure 1, the unemployment rate in each of these cities increased during that period. Figure 3 below depicts the unemployment rate for each of the 10 cities.

City teenage unemp rate

In August 2012 the national unemployment rate for 16 – 19 year olds was 24.3%, a rate that was exceeded by all 10 cities analyzed here. Atlanta had the highest unemployment rate in 2012 at 48%. Atlanta’s high unemployment rate and relatively low LFP rate reveals how few Atlanta teens were employed during this period and how difficult it was for those who wanted a job to find one.

The unemployment rate may increase because employment declines or more unemployed people enter the labor force, which would increase the labor force participation rate. Figures 2 and 3 together indicate that the unemployment rate increased in each of these cities due to a decline in employment, not increased labor force participation.

The preceding figures are evidence that the teenage employment situation in these major cities is getting worse both over time and relative to other areas in the country. To the extent that teenage employment benefits young people, fewer and fewer of them are receiving these benefits. From the linked article:

“The substantial drop in teen employment prospects has had a devastating effect on the nation’s youngest teens (16-17), males, blacks, low income youth, and inner city, minority males,” wrote Andrew Sum in a report on teen summer employment for the Center for Labor Market Studies at Northeastern University. “Those youth who need work experience the most get it the least, another example of the upside down world of labor markets in the past decade.”

Unfortunately, in many cities the response to this situation will only exacerbate the problem. Seattle and Los Angeles have already approved local $15 minimum wages, and a similar law in the state of New York that applies only to fast food franchises was recently approved by the state’s wage board. While many people still question the effect of a minimum wage on overall employment, there is substantial empirical evidence that a relatively high minimum wage has a negative effect on employment for the least skilled workers, which includes inner-city teenagers who often attend mediocre schools. Thus it is hard to believe that any of the seemingly well-intentioned increases in the minimum wage that are occurring around the country will have a positive effect on the urban teenage employment situation presented here. A better response would be to eliminate the minimum wage so that in the short run low-skilled workers are able to offer their labor at a price that is commensurate to its value. In the long run worker productivity must be increased which involves K-12 school reform.